The Ontario government’s 2018 Budget, A Plan for Care and Opportunity includes major new spending on a number of health care, child care, and infrastructure initiatives. While all this spending will boost the economy long-term through higher productivity and labour force participation, the return to deficit spending while the economy is relatively healthy raises the risk of having to shrink deficits and pay down debts during a future recession.

Budget 2018 brings Ontario back in the red until 2024-25. As promised, this year’s $6.7 billion deficit is less than one percent of GDP ($830.1 billion in the third quarter of 2017). Yet the deficit is still substantial, resulting from revenue that cannot grow fast enough to cover huge spending increases over the next three years—particularly on health (4.3 percent per year), education (4.1 percent) and children’s and social services (5.2 percent).

The growth of social assistance spending—largest among all expense categories—is notable given the relatively healthy labour market. Spending by the Ministry of Community and Social Services tends to grow roughly in line with Ontario’s unemployment rate because more people out of work require social assistance. While Budget 2018 importantly raises living standards for the worst-off Ontarians by increasing social assistance benefits and easing eligibility restrictions, the timing of these changes is questionable.

The return of a deficit and resulting higher debt translate to substantial spending on interest payments. Interest on debt this year will cost $12.5 billion or 7.9 percent of total expenses—more than all spending on post-secondary and training. This will continue increasing, with interest payments making up 8.9 percent of total expenses by 2023-24. This is a risky strategy because it relies on low interest rates and high revenues from a strong economy, rather than spending discipline, to ensure the share spent on interest payments remains far below the 1999-2000 peak of 15.5 percent.

With the word “care” in the title, it is no surprise that health care comprised a major line item in Budget 2018, with expenses projected to grow an average of 4.3 percent annually over the next three years, a significant jump from the 1.8 percent growth projected in Budget 2016. This rapid increase in health care spending—which is already twice as large as the next biggest area of spending—runs counter to the restrained growth strategy the Province has taken since 2012. Unless further operational efficiencies can be found, health expenditures will need to keep growing to avoid reductions in access and quality of care in the coming years.

The other big ticket expenditure is mental health and addictions. Over the next four years, $2.1 billion will fund 400 school-based mental health workers and provide more counselling, therapy, and walk-in clinics. In the long term, the decision to invest additional dollars on mental health is a smart move: unaddressed mental health and substance issues impact the economy through absenteeism and lost productivity, and will cost our economy $16 billion in 2041. Investing in preventative care and early intervention is crucial given that roughly one in five Canadians experience mental health problems in any given year.

Infrastructure: Ontario is prioritizing projects with the best productivity returns

Budget 2018 promises $230 billion for infrastructure projects over 14 years—building on the $190 billion over 13 years in the 2017 Long-Term Infrastructure Plan and the initial $130 billion over ten years in Budget 2014. Commitments include $79 billion for public transit, $25 billion for highways, $19 billion in capital grants for hospitals, and $16 billion in capital grants for schools. The Institute continues to recommend that projects be prioritized according to their productivity returns. Investments in hospitals and schools—both of which lead to a positive change in productivity—should therefore have more importance than spending on general roadway infrastructure.

Growth in post-secondary spending is modest compared with health and education expenditures, yet the government is still spending $365 million on experiential learning, a new Ontario Apprenticeship Strategy, and establishing a one-stop-shop ‘skills training bank’ for employers, job seekers and workers. These initiatives are aligned with several of the Institute’s pastrecommendations. The Province is also expanding OSAP eligibility and simplifying tuition payment by including the subtracted OSAP grant and loan funding in the invoice. The gains in efficiency and transparency from this change are maximized the earlier before enrollment students can access this net cost information. However, this change also removes students’ flexibility to use student aid for living expenses, a barrier to accessing post-secondary education.

Minor modifications to increase tax progressiveness

Alongside several modifications and enhancements of existing personal and corporate tax credits, Budget 2018 includes minor changes to make taxation more progressive. Ontario’s personal income tax (PIT) will be simplified to remove an additional surtax currently charged on those making more than $75,000 and instead create two new PIT brackets. Although the top marginal PIT rate is unchanged, the surtax removal will remove inequities that currently allow higher income earners to deduct more through non-refundable tax credits. Ontario also announced it would follow the federal government’s lead on closing income sprinkling and other tax loopholes.

Do the productivity returns offset the spending risks?

The new deficit spending on health care, child care, and post-secondary education are investments that will help grow the economy long-term through higher productivity and labour force participation. But deficit spending during economic growth is countercyclical—these good times should be when the government builds its reserves for a recessionary rainy day. The deficit and consequent increased debt could therefore be problematic if, as feared in the next few years, a recession strikes before these investments can boost economic growth.